Apple & The DRM Free Market Madness

When it comes to DRM free music — that is, music not encumbered by copyright certain playback restrictions — the pitchers are still throwing their warm-up pitches. Nevertheless, there is a lot of excitement leading up to the game.

So far two major music labels — EMI Music and Universal Music Group — have decided to offer DRM free music. Others are still sitting on the fence for now. That hasn’t stopped new entrants from entering what is beginning to look like a very crowded market. Real Networks (RNWK), Amazon.com (AMZN) are among several companies that have already made DRM free music sales a priority.

New players, such as Cupertino, Calif.-based Navio Systems’ spinoff gBox, are launching music-download stores. gBox is planning on launching a content download site, starting off with DRM free music. More traditional retailers are getting in on the act as well; Walmart.com is making a renewed push and will start selling DRM free music. [digg=http://digg.com/apple/Apple_The_DRM_Free_Market_Madness]

The decision of record labels to sell DRM free music is indeed a blessing for music lovers, who until now have been forced to make choices based on their hardware and have subsequently been locked into using proprietary music formats.

Apple and its iTunes store have the biggest market share, and as a result have many consumers locked into Apple’s DRM. “DRM free music is going to help digital music expand from the iPod generation to the mainstream market,” says John McFarlane, CEO of Santa Barbara, Calif.-based Sonos Inc.

However, now you will be able to buy their music from any store, and play it back on a device of their choice. The jury is still out on where consumers will buy their music.

It would seem that this copyright-free music movement would threaten Apple and its iTunes monopoly. But it won’t and here’s why: First of all, a crowded market has always helped Apple, and there is no reason why it won’t be the case this time around. Two years ago I wrote Digital Music Services, Dot Bombs of Today. This is a repeat of that very same situation, except this time around there’s no DRM and so the music is more portable — any store, any device.

Except most of the devices that folks are buying are iPods.

Apple makes most of its money selling hardware, not music. Its hardware rivals have so far failed to come up with a device that rivals the iPod and hence it remains a preferred device of choice, at least in the Americas.

As long as iPod keeps selling well (no reason why it won’t), Apple also doesn’t have to worry about its music sales as long as it starts offering more DRM free music at a price that is similar to its DRM-protected tracks.

The iPod buyers end up installing iTunes software, and are taken to the store, where they are exposed to a relatively simple interface and a cleaner buying experience. It is still unmatched by other services, and I have tried them all: Napster, Real’s Rhapsody and, my favorite, eMusic.

The non-Apple players face a unique challenge: They are fighting over a business where profits are marginal at best. Of the 99 cents for which a song is sold, nearly 70 cents goes back to the record label. Music sellers are left with 30 cents or so and have to use that to build and operate their music stores. That would include costs for storage, CDNs and bandwidth.

If you factor in that the music sellers would have to market their services, and perhaps have to discount heavily to gain market share (Real is saying its customers will pay 89 cents per DRM track), profits are going to be hard to come by. And what happens when broadband service providers start offering access to music libraries for a monthly flat fee?

It is already happening in France, where competitive telecom and broadband provider neuf Cegetel has unveiled plans that let its subscribers pay an additional EUR 4.99 a month for access to the entire catalog of Universal Music Group’s 150,000 songs and 3,000 video clips. How long before others jump into the business?